Preliminary Report of the European Commission on the E ... · Preliminary Report of the European Commission on the E-commerce Sector Inquiry (“Preliminary Report”) Comments of

NON-CONFIDENTIAL VERSION

Preliminary Report of the European Commission on the E-commerce Sector Inquiry

(“Preliminary Report”)

Comments of Amazon EU Sàrl

November 2016

Introduction and General Observations

1. Since its inception as an online retailer in 1995, Amazon has been relentlessly focused

on being the Earth’s most customer-centric company, where people can find and

discover anything they want to buy online. In achieving this goal, we are guided by

four principles: customer obsession, passion for invention, commitment to operational

excellence, and long-term thinking.

2. Providing a high-quality, reliable and trusted online sales environment has been crucial

to Amazon’s success in meeting the demands of its customers. Ensuring such an

environment day-in, day-out is critical, not only for persuading consumers to shop with

Amazon but also for demonstrating to manufacturers that offering their products on

Amazon protects, and even enhances, the value of their brands. Amazon shows that

online retail can be a high quality experience, in which brands are protected and

presented in a manner that is equivalent to the protection and presentation enjoyed in

the offline world, while at the same time offering consumers a vastly enhanced choice

and convenience. Amazon is far from unique in this respect. Indeed, even the most

high-end luxury brands are now sold online, on brands’ own websites, retailers’

websites and marketplaces.

3. Unfortunately, some manufacturers and brand owners nevertheless persist in

discriminating against online retail as a sales method, without objective justification.

Many refuse to engage at all with online retailers, apply selective distribution in an

excessive and inappropriate manner, exclude online retailers from their networks or

impose disproportionate and unjustified restrictions on their resellers that prevent them

from taking advantage of the benefits offered by e-commerce. The end result is that

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products are either not available online at all or are available only to a very limited

extent, meaning that consumers lose out.

4. Amazon therefore welcomed the Commission’s decision to undertake an inquiry into

the e-commerce sector. We note from the Preliminary Report that the sector inquiry

appears to have borne out Amazon’s concerns that the rise of e-commerce has directly

led to a considerable increase in the number and variety of products sold using selective

distribution, threatening the consumer benefits of e-commerce. [Confidential

Information]

5. Amazon also urges the Commission to address now weaknesses in the Vertical

Guidelines, which have arguably contributed to the abuse of selective distribution by

brands. In particular, brands have exploited ambiguities in the wording of paragraph

54 of the Vertical Guidelines to impose ‘brick and mortar’ requirements and absolute

bans on the use of marketplaces, irrespective of the nature of their products or the

quality of the online sales environment offered by a retailer seeking access or the

marketplace on which an authorised reseller wishes to sell the brand’s products.

6. This ambiguity should be addressed as a matter of urgency to clarify that the imposition

of a brick and mortar requirement that is not justified by the nature of the product or

other objective consideration is viewed by the Commission as an unjustified restriction

of passive sales and thus a hardcore restriction of competition. The same approach

should be taken to absolute bans on the use of marketplaces by authorised resellers and

to other common restrictions which, whether individually or in combination, have a

similar effect to online sales bans, including bans on the use of price comparison sites

or online search advertising to attract customers. Such restrictions, which can

effectively make a retailer’s offering invisible to potential customers, have no

equivalent in the offline sales environment and cannot be justified by reference to

differences in distribution method.

7. Such restrictions should be assessed particularly critically in the mobile commerce

segment, which is the most important growth segment of online trading and already

consumers’ preferred shopping segment.

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8. Amazon submits that the cumulative effect of such practices justifies their classification

as hardcore restrictions of competition, under Articles 4(b) and/or (c) of the Vertical

Agreements Block Exemption Regulation (VBER).1 To the extent that there is any

uncertainty over this, we would suggest that this can be addressed through immediate

revision of the Vertical Guidelines.

9. If the Commission considers that the current wording of the VBER does not permit

such an interpretation, this would indicate a material inadequacy in the regulation that

should also be addressed now, rather than waiting until 2022.

10. We would like to provide the following, additional comments on specific aspects of the

Preliminary Report.

The Commission’s general considerations on selective distribution and the physical

store requirement (Preliminary Report, para 198 et seqq.)

11. Amazon notes the Commission’s preliminary findings that the use of selective

distribution systems has significantly increased with the growth of e-commerce (para.

223) and that the adoption of selective distribution or the introduction of new criteria

has often arisen as a specific response to that growth and the greater competition that

e-commerce offers consumers (para. 199-200). Amazon agrees with the view of the

Commission that the use of certain clauses in selective distribution agreements requires

closer scrutiny (para. 228), as does the manner in which selection criteria are applied

by manufacturers (para. 229-230).

12. [Confidential Information]

13. Amazon notes the Commission’s observation (at para. 220 of the Preliminary Report)

that “47 % of the manufacturers using selective distribution reported that they do not

accept pure online players to their selective distribution network”. We find it

implausible that a brick and mortar requirement could be objectively justified in such a

large proportion of cases, particularly in a retail environment in which customers are

1 Commission Regulation No. 330/2010.

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willing to purchase even high-value and complex products online. [Confidential

Information]

14. As the Commission notes at para. 231 of the Preliminary Report, many manufacturers

either refuse to communicate selective distribution criteria to any retailer wishing to be

admitted to their networks or reserve such treatment for pure play internet retailers,

using the brick and mortar requirement as an easy to apply pretext, without any attempt

to justify objectively [Confidential Information]. This cannot be acceptable, in light

of the clear potential for competition to be restricted as a result.2

15. Amazon is concerned that manufacturers have been able to exploit shortcomings in the

current Vertical Guidelines to justify such overly-restrictive selective distribution

policies without (in their minds) raising concerns under Article 101 TFEU. Amazon is

particularly concerned by the tendency of manufacturers to treat the wording in para.

54 of the Vertical Guidelines noting that a “supplier may … require that its distributors

have one or more brick and mortar shops or showrooms as a condition for becoming a

member of its distribution system” as justification for a carte blanche exclusion of ‘pure

play’ online retailers from their selective distribution networks, irrespective of the

product and without any further justification being required.

16. With this in mind, Amazon welcomes the Commission’s clarification that such an

absolute conclusion is not justified, as reflected in the following statement (para. 228

of the Preliminary Report): “For example, the requirement for retailers to operate at

least one brick and mortar shop (thereby excluding all pure players from selective

distribution), while generally covered by the Vertical Block Exemption Regulation, may

need further assessment in individual cases when used for certain product categories

or certain lines of products which pure online retailers might be equally qualified to

sell”.

17. We would nevertheless suggest that the Commission be more explicit on the need to

reinterpret and/or update paragraph 54 of the Vertical Guidelines, to make it clear

2 See, on this point, Case 107/82 AEG v Commission, judgment of 25 October 1983, in which the Court noted that, in the absence of a

clear pro-competitive justification for selective distribution, its “sole effect would be to reduce price competition” and thus maintain unjustifiably high prices (at paragraph 34).

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beyond doubt that there can be no general assumption of the lawfulness of a brick and

mortar requirement. Indeed, in particular because it is hard to see how a brick and

mortar requirement can ever be objectively justified in the contemporary retail

environment, we would urge the Commission to go further to protect competition and

to take the approach that the use of such requirements amounts to a hardcore restriction

of online retail that is presumptively unlawful and therefore outside the VBER.

The Commission’s findings and conclusions regarding marketplace restrictions (para.

408 et seqq.)

18. Amazon agrees with the retailers and marketplaces cited in the Preliminary Report that

the main reason for manufacturers introducing marketplace restrictions is their desire

to reduce the number of sellers selling online and thereby to avoid the increased price

transparency and increased price competition offered by the internet (para. 454).

19. Amazon has always strongly rejected, and always will strongly reject, any attempts by

its suppliers to engage it in anticompetitive conduct, whether by influencing retail

pricing on Amazon or otherwise. [Confidential Information]

20. In this context, Amazon considers that the Commission’s view, as noted in para 473 of

the Preliminary Report, that absolute marketplace bans may not be compatible with

competition law, is a positive development.

21. Amazon also strongly agrees with the Commission’s observation at para. 474 of the

Preliminary Report that a marketplace sales ban that is ostensibly based on brand

protection considerations or a lack of pre- or post-sales service is particularly hard to

justify in circumstances where a manufacturer has accepted the marketplace operator

as an authorised seller or if the manufacturer is itself selling on the same marketplace.

22. Amazon is nevertheless concerned that the Commission appears to be prepared to

maintain an overly permissive approach towards marketplace bans. In particular, we

note with concern the Commission’s assessment in the Preliminary Report that

marketplace bans “should not be considered hardcore restrictions within the meaning

of Articles 4 (b) and 4 (c) of the Vertical Block Exemption Regulation” (para. 472).

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23. Given the material harm that marketplace bans can cause to both retailers and

consumers (inter alia, by reducing price transparency and price competition), we would

like to elaborate on this point as follows:

• We do not share, and would like to better understand, the Commission’s

presumption that, in order to be considered as having the object of restricting

passive sales, marketplace bans would need to amount to a total ban of the use

of the internet as a method of marketing (para. 468). As the Vertical Guidelines

make clear, any provision that unduly limits a distributor’s access to customers

through online sales, such as differential pricing, mandating a maximum

proportion of total sales that may be made online, mandating geo-blocking (all

para. 52 of the Vertical Guidelines) or applying criteria for online sales that are

not overall equivalent to a supplier’s criteria for offline sales (para. 56 of the

Vertical Guidelines), should be viewed as a hardcore restriction of competition.3

• The logic that dictates that such discriminatory measures should be seen as

hardcore passive sales restrictions applies equally to marketplace sales bans.

Even if a member of a selective distribution network remains free to use other

ways of selling online (e.g. by operating on own online shop), the imposition of

a marketplace ban clearly has the potential to have the object of restricting that

retailer’s ability to make passive sales, particularly when combined with other

restrictions, such as bans on the use of price comparison sites or search

advertising, that make online sales difficult or practically impossible (see also

para. 26 below).

24. The Preliminary Report further states as follows (para. 469): “the importance of

marketplaces and, consequently, the impact of marketplace bans, vary significantly.”

While Amazon agrees that the importance of marketplaces varies depending on a range

of factors, we do not see how this variation can support a general conclusion that

marketplace bans should not be viewed as hardcore restrictions (para. 472).

3 Amazon commends the logic of the approach taken by the German Federal Cartel Office (FCO) in this context, in particular in its

recent ASICS decision (Ref. B2-98/11), in extending this treatment to the imposition of bans on the use of price comparison sites and the use of a supplier’s brand for search advertising, due to their equivalent effect.

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25. Rather than using the existence of such differences to justify an overly permissive

approach to marketplace bans [Confidential Information] the appropriate approach

would be to start from a sceptical position concerning their legality, while allowing for

individual analysis in specific cases. This point is developed further in the ‘Legal

assessment’ section below.

26. As noted above, the combination of a marketplace ban with other restrictions limiting

the ability of retailers to attract customers online, such as a prohibition of the use of

price comparison sites or the use of search advertising, will exacerbate the restriction

of competition, especially for small and medium-sized retailers, by rendering retailers

practically invisible to customers.

Legal assessment

27. As noted above, the Commission takes the position in the Preliminary Report that

differences in the importance of marketplace sales across territories, seller groups and

product justifies a permissive approach to marketplace bans. We do not believe the law

supports that conclusion. It is well established that the characterisation of a restriction

as one that infringes Article 101 ‘by object’ depends upon its “economic and legal

context”.4 As a result, rather than starting from the position that marketplace bans

should not be viewed as hardcore restrictions, there is ample scope for the Commission

to take into account the importance of marketplace sales in a specific case to establish

whether, on the particular facts, such a ban should be viewed as a hardcore restriction

of competition.

28. We would also like to comment on the assessment of the Commission that “the

preliminary findings of the sector inquiry do not indicate that marketplace bans should

be considered hardcore restrictions within the meaning of Article 4(b) and/or Article

4(c) of the Vertical Block Exemption Regulation. The Commission considers that such

clauses do not have as their object (i) a restriction of the territory or the customers to

whom the retailer in question may sell or (ii) the restriction of active or passive sales

to end users” (para. 472).

4 See, in particular, the judgment of the ECJ in Case C-67/13 Groupement des Cartes Bancaires v. Commission, para.53.

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29. According to settled ECJ case law, the VBER (as other block exemptions) must be

interpreted restrictively. This principle suggests that the hardcore restrictions set out in

Article 4 of the VBER should not be interpreted overly narrowly, since to do so would

unduly broaden the block exemption’s protective scope to include agreements that

would be more appropriately subjected to an individual assessment under Article

101(3) (cf. ECJ judgment of October 13, 2011, C-439/09, para. 57 – Pierre Fabre).

30. In this light, we believe that the following assumption of the Commission requires

critical analysis: “They [meaning: marketplace restrictions] concern the question of how

the distributor can sell the products over the internet and do not have the object to

restrict where or to whom distributors can sell the products.” We believe that this is

not correct: First, a marketplace ban prohibits any and all passive selling to all

marketplace users. The fact that the same customers are generally able to use other

ways to purchase goods, whether “online” or “offline”, does not detract from this

conclusion, as it is the specific context of the restriction that is decisive. After all, no

group of people can be exclusively reached over one single distribution channel and it

would be artificial to rule out defining a customer group by reference to one

characteristic, simply because they also display other characteristics in other contexts.

31. We understand that any restriction of a retailer’s freedom to reach potential customers

by online sales is sufficient to find a violation of Article 4(b) VBER.5 The fact that

Article 4(b) VBER only mentions that sales to the customers in question must be

“restricted” (i.e. that such sales freedom is restrained, thereby reducing potential sales),

rather than completely prohibited, supports this finding.

32. In line with the above, also – and a fortiori –a hardcore restriction applies pursuant to

Article 4(c) VBER as the “customer group” in question here – no matter its exact

definition – in any case comprises “end customers”, as referred to in Article 4(c) VBER.

Marketplace bans by definition restrict passive sales to end customers. Such bans

therefore contradict one of the key principles of selective distribution, namely that

5 See, for example, the references at para. 52 of the Vertical Guidelines to practices that have the “capability … to limit the distributor’s

access to a greater number and variety of customers” and at para. 56 to restrictions that “dissuade appointed dealers from using the internet to reach a greater number and variety of customers”. In each case, these are specifically classed as hardcore restrictions, notwithstanding the absence of an outright prohibition on internet sales. (See also para. 23 above.)

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authorised dealers’ deliveries to end customers must not be restricted in any way.

By preventing any marketplace sales to any end customers, irrespective of quality

considerations, this principle is not complied with.

33. We also do not agree with the following statement of the Preliminary Report: “Such an

approach [meaning: considering marketplace bans as not constituting a hardcore

restriction under Article 4(b) or 4(c) VBER] is in line with the Vertical Guidelines

which specify that marketplace restrictions requiring the retailer to use third party

platforms (e.g. marketplaces) only in accordance with the quality criteria agreed

between the manufacturer and its retailers for the retailer's use of the internet are not

considered as hardcore restriction.”

34. This ignores the fact that absolute marketplace bans lack any reference to “quality

criteria”. They are “absolute” in that they prohibit any sales on marketplaces, no matter

which criteria the seller and/or marketplace may be able to fulfil. Amazon’s submission

is that such policies amount to a hardcore restriction of competition precisely because

they make no attempt to link this prohibition with any quality criteria.

35. This approach is supported by other provisions of the Vertical Guidelines, including

the following language at paras 54 and 56:

Para 54: Under the block exemption the supplier may require quality standards for the use of the internet site to resell his goods, just as the supplier may require quality standards for a shop or for selling by catalogue or for advertising and promotion in general.

Para 56: Therefore, the Commission regards as a hardcore restriction any obligations which dissuade appointed dealers from using the internet to reach more and different customers by imposing criteria for online sales which are not overall equivalent to the criteria imposed for the sales from the brick and mortar shop.

36. Again, in the case of absolute marketplace bans, there is no application of criteria for

online sales (as referred to in para. 56 of the Vertical Guidelines) or quality standards

(as referred to in para. 54 of the Vertical Guidelines) at all. On the basis that these are

foreseen as an essential characteristic for selective distribution arrangements to be

compatible with the VBER, we would suggest that the Vertical Guidelines themselves

actually support treating absolute marketplace bans as a hardcore restriction in the

meaning of Article 4 (b) and Article 4 (c) VBER.

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37. Part of the problem here may be the wording of the final sentence of paragraph 54,

which purports to illustrate the general principle set out in the penultimate sentence

cited above by stating that “For instance, where the distributor’s website is hosted by

a third party platform, the supplier may require that customers do not visit the

distributor’s website through a site carrying the name or logo of the third party

platform” (emphasis added). The meaning of this additional sentence is not clear.6 In

the first place, references to “hosting” and “visiting a distributor’s website” are peculiar

and do not reflect commercial reality, since third party marketplaces do not commonly

“host” sellers’ websites but rather provide an opportunity for sellers to advertise their

products on the marketplace site. Second, the sentence appears to go beyond the

proposition in the preceding sentence that it is intended to illustrate, unless it can always

be assumed that any sale on any third party platform will always and necessarily fail to

meet any supplier’s standards and conditions for direct online sale. As well as being

hard to maintain as a matter of logic, such an assumption would be contrary to the

overall approach of the VBER and Vertical Guidelines, which views undue

discrimination against online retail as a hardcore restriction of competition and hence

unlawful.

38. We would suggest that manufacturers that currently seek to rely on paragraph 54 of the

Vertical Guidelines to support absolute marketplace bans are wilfully exploiting this

lack of clarity in the drafting of the last two sentences of that paragraph and that the

Commission should take the opportunity offered by the sector inquiry to make it clear

that such an approach is not justified.

Quality and equivalence

39. As the Commission notes at para.56 of the Vertical Guidelines, the imposition on

members of a brand’s selective distribution system of criteria for online sales that are

not “overall equivalent” to the criteria imposed for sales in an offline environment

amounts to a hardcore restriction of competition. Amazon agrees with the Commission

that this does not mean that criteria for offline and online retail must be identical but

6 This may in part be due to the history of this sentence, which was inserted into the draft Vertical Guidelines late in the legislative

process, without any stakeholder consultation.

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that, rather, criteria should pursue the same objectives and achieve comparable results,

with any differences being justified by differences between the distribution methods.

40. It is certainly not the case that online stores and marketplaces are inherently unable to

protect brand image, in particular when it comes to a high-quality online experience

such as that offered by Amazon. To give just two examples of ways in which Amazon

protects brands’ legitimate requirements for presenting their products:

• Amazon enables manufacturers and retailers to embed prestigious brand

products within the respective corporate identity via tailored “landing pages” –

so-called brand stores. Many manufacturers of branded products have set up

such a brand store on Amazon that shares many design elements with their own

online stores. (A screen shot of such brand stores is included at Annex 2.) This

shows that Amazon makes it possible for brands and their sellers to fully comply

with their corporate identity and that a complete ban on the use of marketplaces

cannot be justified on this ground.

• Amazon also sets up so-called “premium beauty stores”, especially for cosmetic

brands, which enable prestigious brands to be represented adequately on the

Amazon Marketplace. There is no practical difference between the

representation on the Amazon website and the one on the retailer’s website.

41. This, and the experience offered by many other high quality online retailers and

marketplaces, demonstrates that the assumption that such sales channels are inherently

inadequate for protecting brand image is an outdated cliché that neglects both the

ongoing technical innovation in online retail and consumer behaviour, which has

readily adapted to such innovation. [Confidential Information] In any event, there

are less severe means than imposing blanked restrictions such as a general marketplace

ban that would be able to address any legitimate “brand image” concerns, e.g. a

requirement that a marketplace must meet objective quality criteria.

42. In fact, by using high quality marketplaces such as the one offered by Amazon, retailers

typically facilitate the provision of additional advice and information that often go

beyond services provided in-store or on their own websites, to the advantage of the

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consumers. Such additional services include e.g. customer ratings, product descriptions

by customers and manufacturers, price comparisons or demonstration videos. This is

supported by the FCO’s comprehensive market investigations as set out in its

submission to the German Federal Court of Justice (BGH) on the Deuter case7. Hence,

marketplace bans result in a reduction of the services available to consumers, instead

of safeguarding them.

7 See submission of the President of the German Federal Cartel Office on the case cortexpower.de GmbH vs Deuter Sport GmbH, 7 July

2016, KZR 3/16, p. 22 et seqq.: “Based on the current status of E-Commerce, there is no reason to assume that the level of services available in online distribution to satisfy a customer’s need for advice necessarily has to stay behind similar services available in offline distribution. Rather, online distribution today offers the opportunity to explain the use of even the most complex products by providing centralized, professional information (including tutorials in the form of films). An additional advantage of this kind of information is that it is available to the customer not only at the moment of the purchase, but also at a later point when the product is used by the customer for the first time. The provision of advice in online distribution often exceeds similar services in the offline world, which is why many customers are informing themselves online before purchasing the product in a physical store.”

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Conclusion

43. Amazon views the Preliminary Report as a strong step in the right direction. Amazon

encourages the Commission to develop its thinking further in its final report, by

stressing the benefits of e-commerce for consumers and emphasising the harmful

effects of common restrictions such as physical store requirements and marketplace

sales bans. For the reasons set out in these comments, the Commission should clarify

in its final report, and through urgent revision of the Vertical Guidelines, that such

restrictions may amount to hardcore restrictions of competition.

44. [Confidential Information]

45. For the reasons set out above, we consider that our suggested approach to physical store

requirements and marketplaces bans is compatible with the current text of the VBER,

as clarified through revised Vertical Guidelines. Should the Commission disagree, we

would suggest that it should bring forward its review of the VBER, rather than wait

until its scheduled expiry in 2022.

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Annex 1

[Confidential Information]

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Annex 2: Comparison of brand retail websites vs Amazon brand stores

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Waterman Paris website

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Waterman brand store at Amazon.de

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Hugo Boss Website

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Hugo Boss brand store at Amazon.de

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Deuter Sport Website

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Deuter Brand Store at Amazon.de

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Asics website

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Asics brand store at Amazon.de